Asset Class Taxation
I've been a PRC user for 7 years now and love it. Happy to see this forum for users.
A persistent short-fall for me has been the Asset Class Taxation tables. I've experimented with different values and seen, as the manual states, that "determining the percentages to plug into the taxation table can be non-trivial." This has a very big impact on my projections. But I find the manual's instructions on how to determine the values to be completely overwhelming. What does "dig into our records and determine the specific dollar amount of interest and NQ dividends, . . . " mean? What records? And how would I determine these amounts? My wife and I each have our own brokerage accounts, and at this point (just retired) the total value of the two accounts is 34% of our net worth, so this is not a trivial issue. Is there a simpler way of estimating these numbers or are there "default" values that might be close enough for most investors, or perhaps a simplified estimate based on asset allocation?
By records, I mean the document (either on-line or maybe an annual statement from your brokerage form) that identifies your assets and the performance of each of those assets. That will probably include cost basis, current market value, dividends and interest paid.
Then, you need to group your assets (in the on-line statement) to be consistent with the asset classes you've entered into PRC to enable you to determine the manner in which the growth of these assets is taxed. To keep this simple, let's say you break them into just three classes: money markets, stocks and bonds. This is pretty close to what I do myself. Staying with simplicity, you could just assume that all growth of money markets and bonds is taxed as simple interest. And for stocks, you could just assume it's all appreciation or maybe a small percentage of dividends and the rest appreciation (unrealized capital gains). The statements from your brokerage firm should be consulted to confirm that these choices are fairly good estimates.
I'm not an CFP so cannot advise you on good default values to assume. Hopefully someone else will lend their expertise to better flush out a good answer for you.
To add to this, keep in mind that any distributions from traditional retirement accounts are taxed as regular income, so the rate would be whatever you anticipate your effective (not marginal) tax rate to be. In Roths, you aren't taxed, of course. In non-retirement accounts (personal brokerage), as Stuart said, money markets and bonds produce interest income, taxed as income.
For dividends paid out by stocks/funds, it's a little more complicated. If you've held those securities less than a year, they're short-term gains/losses, and treated like regular income. If you've held them longer than one year, they're treated as qualified, or long-term gains/losses, and subject to the much more favorable long-term gains tax tables (most people are in the 15% bracket).
You only experience these stock/fund gains/losses when you sell the investments. The kicker is that if the fund managers are buying/selling within the funds you own, you are actually selling, perhaps unbeknownst to you 🙂 Those are the 'unrealized gains/losses' sitting in the funds, and you should see those on the statements or summary online. You will get a 1099 and be taxed on those gains, or can write off the losses (up to $3,000/year with carryover available).
This is why it's important to watch out for funds with high turnover rates in non-retirement brokerage accounts (morningstar.com shows this stat). And why I'm a fan of index funds - very tax favorable, since there's very little turnover, and super-low expenses.
I wanted to further clarify this, and hopefully Stuart will check me if I'm wrong.
If, for example, all of your stocks are in your traditional 401k/IRA type retirement accounts, you would be putting 100% in the Growth Taxed as Simple Interest column for stocks. You don't have capital gains in pre-tax retirement accounts, all distributions are taxed as regular income, as simple interest is.
If you had stocks in both traditional retirement accounts and personal after-tax brokerage accounts, you'd have to do a little math in this area to dial it in.
@hines202 I would like to add some clarification on this. In PRC Gold, the Financial Assets > Taxation page applies ONLY to regular investment accounts (i.e., after-tax brokerage accounts) and never to tax-deferred or Roth accounts. Withdrawals from tax-deferred accounts are ALWAYS taxed as ordinary income and withdrawals from Roth accounts are ALWAYS tax-free, so there is no need for the user to specify anything in this regard.
It might be very helpful to many of us for those who've used PRC and have in-depth knowledge of how to set up asset classes that follow some of the more popular "clustering" (i.e., Bogleheads, Merriman) and share them here
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Ok, newbie on the forum here. I have been using PRC for about 7-8 yrs and had made the mistake that I thought the Tax Table was for all investments, and not just the regular investments. And I recently retired and started drawing on it. So now I am going back and trying to determine how to recalculate the values. I am struggling with determining the annual unrealized gains and therefore the Denominator for the equation. i.e. the total returns. I can look at my 1099-Div and I have the Dividends and Capital Gains reported to IRS but I am missing the Unrealized Gains. I am not sure but I believe that Short Term Cap Gains reported on 1099-B should lumped in as Simple Interest. But not sure how to figure that into a % that would carry over yr to yr.
To follow what you did in another thread.
(Int & Unq Div) + (LTCapG + Q Div) + (Unre LT Cap G) + Tax Free Growth = Total Returns.
(Int & Unq Div)/Total Returns = % Simple Intrest
(LTCapG + Q Div)/Total Returns = % LTCG Growth Taxed Annually
Unre LT Cap G / Total Returns = % LTCG Growth Taxed when withdrawn.
Tax Free Growth / Total Returns = % Tax Free Growth.
And Since I am no longer reinvesting the dividend but rolling them into the Money Market - Cash. I am assuming the correct action is to remove the new Reinvestment check mark.
Any help is appreciated.
@grey226 Yeah, this can be a tough one if you sweat the details, but I'll try to provide some help and hope that others will pitch and provide more help. I don't think reports from a brokerage firms report unrealized gains on an annual basis but they do report cost basis and market value. The difference between these is the unrealized capital gains over the time you've held the asset. So, you can estimate the annual percentage by dividing this difference by the number of years you've held this asset.
And, yes, if you're no longer reinvesting your dividends you should uncheck that box. With that said, when you say "Money Market - Cash" it concerns me that you might possibly be misunderstanding something: with the box unchecked, dividends go into the Cash account which is equivalent to your checking and savings account at your bank.
Now, I'll go further and share what I do personally (which is generally reflected by the default settings on the Taxation page). And please realize that I'm not an advisor and not obsessed with detail, particularly in this area. I certainly don't use those formulas included in the manual. I simply assume that money market growth is taxed as simple interest, that taxable bonds are taxed as simple interest, that municipal bonds are taxed as tax-exempt and that stocks are taxed as 5% qualified dividends and 95% as unrealized capital gains. That easily gets close enough for me.
@smatthews51 it would be a nice addition if there was a way to enter Municipal Bonds that are federally tax exempt, but PRC still did the state tax. I looked thru the manual and thru some posts, but did not find a way to do that. your estimate method in this post is ok, but maybe put on your improvement list?
@carlucci612 There's definitely no way to do that currently. I'll add it as a candidate improvement for the future, but I think there are a number of more significant state tax improvements that could be made that will likely take precedence in the near term.